Mongolia
sits atop billions of dollars of mineral wealth and its economy is poised to
grow rapidly,
but foreign investors are finding that geopolitics hangs heavy over business in
a nation caught between China and Russia, says a Reuters analysis.  Few companies are more aware of the perils of
investing in Mongolia than Canadian miner Khan Resources,  now battling the might of Russia for the
rights to a uranium deposit in the country”s remote northeast.

Khan”s licenses for the
Dornod uranium property were cancelled after what it alleged to be a show of
muscle by Moscow and Russia”s state-owned ARMZ Uranium, and it has now filed a
lawsuit seeking to overturn the decision.  But Khan itself had been
planning to sell out to the state-owned China National Nuclear Corporation
(CNNC), raising perennial Mongolian fears about Chinese dominance. However, the
Chinese company dropped the planned acquisition last week.  “We are
right in the middle of a geopolitical war,” said Grant Edey, a Khan
company director, shortly after filing the lawsuit.

 Khan insists it did all
it could to comply with a series of changing ownership and registration
requirements in Mongolia, but T. Bayarbayasgalan, the head of licensing at the
country”s new Nuclear Energy Agency, said it did not do enough.  “The
company was raising capital in the name of Mongolian uranium resources, and the
main reason why the licenses were cancelled was because it had violated many of
our laws,” he said.  In particular, Khan violated an article in the
new Nuclear Energy Law which stipulates that a company needs the permission of
the Mongolian authorities if it intends to transfer its shares, he said.

Mongolia broke away from the
crumbling Soviet system in 1990, and while it is struggling to stay neutral
between its two giant neighbors, it may still be amenable to some Russian  persuasion. 
China, on the other hand, relinquished any claim to Mongolia in 1950,
but has done little to allay suspicions that its economic dominance could lead
to political hegemony.

More than 70 percent of
Mongolia”s exports went to its southern neighbour last year.  The bulk of
Mongolia”s oil is being produced by Chinese firms and most of the big projects
now being developed — including Ivanhoe Mines” USD5 billion copper-gold
project at Oyutolgoi — are also counting on surging Chinese demand.
 Plans are also under way to develop the Tavantolgoi coking coal mine, the
world”s biggest untapped deposit of its kind.  Project financiers are
eyeing development of railroads to link the country”s major energy resource
centers to energy-hungry markets in the north and south.

But
it is always more than mere economics in Mongolia, economists and analysts
say.  “A country like Paraguay would
die to have a market like China on its border, but there is this concern about
the imbalance of populations and power,” said Peter Morrow, chief
executive of Khan Bank, one of the country”s biggest lenders.

Alan
Wachman, an expert in Mongolian politics at Tufts University in the USA, says
China has done nothing to Mongolia to warrant this level of anxiety.  “But when I press Mongolians about this,
they say there are plenty of people in China who say that Mongolia is
fundamentally Chinese and that this suggests an intention that has to be taken
seriously,” he said. “They ask what are we to do given our size and
power if the Chinese begin to act on it? It puts this whole thing in the realm
of emotions rather than any kind of rational analysis.”

More than 70 percent of
Mongolia”s exports went to its southern neighbour last year.  The bulk of
Mongolia”s oil is being produced by Chinese firms and most of the big projects
now being developed — including Ivanhoe Mines” USD5 billion copper-gold
project at Oyutolgoi — are also counting on surging Chinese demand.
 Plans are also under way to develop the Tavantolgoi coking coal mine, the
world”s biggest untapped deposit of its kind.  Project financiers are
eyeing development of railroads to link the country”s major energy resource
centres to energy-hungry markets in the north and south.

 At Khan”s Dornod
property, Russia to the north and China to the east are visible from the nearby
hilltops, illustrating the company”s fragile position as well as the country”s.
 Khan bought the abandoned Russian property of Dornod around a decade ago,
company director Edey said, after coming to an agreement with the former owners
and the Mongolian government.

But Russia has since sought a
greater stake in a national uranium reserve estimated at 1.2 million tons. An
agreement to explore the material was signed in 2008, and ARMZ last year set up
a joint venture with Mongolia”s MonAtom to develop Dornod — even though Khan
Resources was already there. “They are now acting like they never sold
them,” said Edey.

 While China”s CNNC had
expressed interest previously, Edey insisted Khan”s legal problems long
pre-dated the Chinese company”s involvement. Khan”s shares were already in
freefall as a result of the licensing issues, prompting ARMZ to table a hostile
acquisition bid and leaving Khan with no choice but to seek out a “white
knight”. In the end, a company like Khan didn”t have the clout to fight
its own corner or negotiate the complex political challenges that face
Mongolia.

A
global intelligence analyst says, “Mongolia was looking at this push
around the world to build new nuclear reactors and wanted to be the one
controlling the sale of this resource, but it also wanted to offer it to Russia
in return for a balance of power against China. In the end the Mongolian
situation is one of excessive insecurity. It could be very realistic from a
Chinese businessman”s perspective that this is pure business, but if you are
Mongolian, how can you take the risk of putting even more of your business in
the hands of the Chinese?”